Lance Lewis on gold & the dollar, posted with permission. Lengthy excerpt from Friday's column, but worth the time. I read his page daily:
dailymarketsummary.com
Gold opened slightly lower in NY and then proceeded to grind higher for the remainder of the session. There was a small give back at the close when the metal could not get above the $400 level, but we basically went out on our highs of the day, up $1.30 to $397.20 (its second weekly close below $400 in a row). The HUI rallied up to yesterday’s highs intraday but failed near those highs and slid into the close to end up nearly a percent. Once again, the shares appear to have correctly anticipated that the metal would rally today by inching higher yesterday in the face of a weaker metal. However, I don’t think it changes anything other than the fact that we still may have some work to do before the metal and the shares trade lower again, which I full expect them to do if the dollar index makes a new high for the year and completes its double bottom and equities in general break hard like I think they will.
Next week will be pretty important for the dollar and thus gold and its shares. The way things are setting up, the dollar index will likely either complete its double bottom next week by breaking out above its high for the year (sending gold and its shares dramatically lower), or it will fail and fall back to the lows (and gold and its shares will rally to potential new highs). So, let’s see what happens. Remember, the long-term case for gold looks great as central banks will no doubt get into a competition as to who can debase their currency the fastest. Hopefully, my readers that are gold bulls understand that what I am trying to avoid is what I see as a huge correction before the next stage of gold’s bull market begins, where I believe the metal will begin rallying all currencies. By avoiding the selloff that I still see as lying directly ahead, we’ll also position ourselves to scoop up some bargains at some point as well. Think of it as selling out of GE before the 1987 crash, and then looking to buy back later. If I am wrong about the correction, we’ll have plenty of time to buy the gold shares back before they make new highs. For now though, the bears still have the upper hand, with both the gold shares and the metal near their lows for the year. So, let’s see what happens next week.
The US dollar index fell half a percent after running into resistance up at it’s high for the year, which would give us our breakout above the double bottom’s “neckline” on the charts. A pullback for a day or two would be pretty normal here before any dramatic move higher, so I see this as pretty normal so far. The yen and euro both bounced half a percent. The Japanese also revealed overnight that they had intervened to the tune of $30 bil in February, down from January’s $68 bil. So, although their intervention has slowed, they still appear to be pouring it on. And since we know that we’ve had net private foreign purchases (i.e.- not central bank purchases) of US assets in Q4, it’s hard to see how anyone other than speculators is taking the other side of the BOJ and MOF’s intervention unless those private flows have suddenly changed in the last 2 months. Remember, the BOJ has unlimited firepower in this battle. The specs do not. They will lose, period. We have two big days next week for the dollar. First, is the ECB meeting on Thursday where the ECB might cut interest rates. Second, is Friday’s unemployment number, where a big jump in payrolls would push up short-term interest rates and the dollar.
Treasuries were higher in price, with the yield on the 10yr falling below the 4 percent level to 3.98% and threatening to break to 7-month lows. Bond market sentiment remains heavily bearish, with a recent Merrill Lynch survey showing that 88 percent of respondents saidthat they thought yields would be higher one year from now, while only 4 percent felt they would be lower. Again, it appears that any spike in yields that we might see as the dollar rallies will be brief if it appears at all in the long end. And I can make the argument that the long end will rally in price (collapse in yield) from here as stocks fall and the dollar rallies, with only the short end potentially moving up in yield. Any selling by central banks to stem a dollar rally and let specs out of their dollar shorts would likely be overwhelmed by safe haven buying to some extent. Basically, I think yields are headed back to their summer lows in the long end, but that’s assuming that stocks break down from here.
$43.7 bil flowed into mutual funds in January we were told today. That’s the third biggest inflow on record. Based on the recent action in stocks and the fund flows data, these inflows slowed dramatically in February. So, predictably the public appears to have piled back in at the top, as is generally always the case.
It was month end today, where normally we see quite a bit of tape painting. So, I was a little surprised that stocks were as weak as they were. The NASDAQ appears to have potentially completed its bounce, and we now appear to be set to break lower and take out 2000 early next week. This should pull down the S&P and Dow below their 50-day moving averages and complete their double tops. Around that same time, we should also see the dollar index “breakout” above its double bottom. So, you can see that a perfect storm for the reflation trade is set up to potentially begin next week. But let me stress “potentially.” Obviously, things often take much longer to develop than you think (this bear market rally has gone on much longer than I ever dreamed of for example), and we could very easily have more dancing around to do before all the pieces fall into place. But the blowing up of this short dollar/long commodities and stock trade continues to be the key to this bear market rally ending in my opinion, and I continue to believe that the only type of ending appropriate for the degree of speculation that we have witnessed over the last year and the nature of the leverage being employed is some sort of crash. So, it’s better to be prepared and early than to be caught flatfooted. |
